An Analysis Of Current Industry Characteristics And The Future Of The Traditional Grocery Store

In an industry that has long been slow to evolve, business has never been more competitive and complex for grocery retailers as they navigate the rapid transformation of consumer preferences and industry disruption, driven by technological innovations both online and in-store. This article will provide an analysis of current industry characteristics by means of the “Porters Five forces” framework and will highlight the most pivotal developments using PESTLE factors. Ultimately, an outlook of the future of the traditional grocery store will be given.

Fight for a Piece of the Pie

“Porter's Five Forces” will analyze the industry by examining: competitive rivalry, Buyer bargaining power, Supplier bargaining, threat of substitutes and threat of new entrants (Porter, 2008).

The grocery industry is extremely saturated one in which retailers compete on quality, service and price. According to Karolefski (2019), supermarkets failing to adjust to changing consumer expectations enable other retailers to get a hold on just these. Discounters, convenience stores and online retailers now all compete for a piece of the pie. Particularly discounters were able to claim a big slice: Schwarz Group, which owns discounters Lidl and Kaufland, is now Europe’s largest food retailer (Kuijpers et.al, 2018).

Aside from a high competitive rivalry, the threat of substitution has increased as well. Manufacturers have started to directly sell to consumers, and food-service establishments have managed to claim the lunch and dinner occasions. Consider for instance, the meal-kit business which is among the fastest-growing food segments in Europe. Bargaining power of suppliers within the industry is relatively low as retailers can choose from many suppliers, including local, regional and national wholesalers and producers, domestically and overseas.

Additionally, a higher bargaining power for retailers enables to buy in bulk and ultimately appeal to consumers in terms of price. Low prices are also part of the consumer appeal of online players such as Amazon, which is just getting started in grocery with its acquisition of Whole Foods (Kuijpers et.al, 2018). The combination of Amazon’s operational and digital excellence, Whole Foods’s brick-and-mortar stores, and the two companies’ customer base has spawned and omni-channel giant. Similarly, ecosystems are mushrooming across the globe and gaining considerable growth in e-commerce.

In China, Alibaba aims to smoothly integrate offline and online channels, it refers to its ecosystem “New Retail”. Data-driven personalization, as well as network and scale effects, drive down ecosystems’ costs while gaining customers. In a market which is volume-driven and in which switching costs for consumers are extremely low, consumers and players able to meet consumer-expectations control the market.

Disruption on Three Fronts

A popular tool to analyze the external environment of an organization is the well-known PESTLE framework. While being useful in its entirety as input for strategic decision-making, this blog will lay the focus on the sociodemographic (sociocultural) and technological developments affecting the grocery industry, as the response to these will determine the future of the traditional grocery store.

Consumer behavior, technology, and new competitors are constantly changing and emerging, however, the interplay of these forces has never been stronger. Merely a handful of grocers have been able to utilize these forces to their benefit.

Changing Habits and Preferences Among Consumers

Nowadays, consumers expect to be able to buy anything, at any place, anytime, at the lowest price possible. Particularly Millennials demand a lot. In a UK survey among supermarket customers, millennials mentioned they look for healthier food choices. On top of this, they want to be aware of how their food is made and where it comes from. They expect companies to care about the triple bottom line and to offer sustainable, traceable products in keeping with this. At the same time, they chase deals and discounts and lean towards the convenience of online shopping.

One change in behavior that can be found in every demographic group, though, is the fact that they are all shy away from cooking themselves. All over the globe, ever more consumers are purchasing ready-made meals. In both USA and Europe, food service shows a higher growth rate than home consumption. In the US, food-service revenues have already overtaken food-at-home sales. Supermarkets consequently struggle to meet all these expectations and demands without price increases.

New Technologies

Another trend disrupting the industry is the rise of new technologies. The success of Amazon can partly be ascribed to the price transparency the digital landscape brought to the game.

To remain competitive, brick and mortar retailers kept prices low even with costs increasing. Furthermore, most grocers have failed to utilize state of the art technologies such as advanced analytics, AI, and IoT as systematically as the competition.

Amazon’s website, for instance, provides product recommendations based on advanced analytic. The bins and pallets in its warehouses are moved around by robots, and the introduction of innovations such as Dash and Echo devices has simplified the shopping experience. Many traditional supermarkets are having trouble keeping up with these innovations.

A Glance at the Future

Naturally, in order to stay relevant in this demanding marketplace, traditional grocers need to devise ways to address the aforementioned factors to capture both customers and profits. While countless strategic moves can be identified, there will arguably be no way around the systematic deployment of technology throughout the value chain, as it can pave the way for differentiation, cost reduction, and can greatly enhance customer engagement.

Technology as Differentiator

One option is the use of consumer interfaces, such as screens attached to shopping carts or apps that navigate customers through the aisles. Sensors in the shelves can keep track of the items in customers’ shopping carts and bill their payment function in their app upon exiting the store. This real-time data could enable grocers to introduce ‘just-in-time’ deliveries, while reducing the space and cost of on-site stock keeping in the process. Supermarkets might also opt for decreasing costs by scaling down their property, using more of their shelf space for the display of fresh produce. Another possibility is that traditional grocery stores undergo a concept change, transforming into a combination of click and mortar. Since an omnichannel experience is what consumers seek, stores could thus integrate the physical and digital scape.

This way, consumers will be given a chance to see and touch products before ordering them online. Consumer could access these products via their interactive screens at the same time. These screens could also be used to inform the customer about each product’s origins, ingredients, expiration date, or potential recipes it might be used in. This would address the customer’s need for transparency and convenience along with providing a unique shopping experience.

Another way of getting the customer engaged and reclaim the sales pertaining to lunch and dinner is offering a home delivery option. For this purpose, some store space could also possibly be reallocated to fulfilling just these orders placed off- or online. While opportunities are manifold, one thing seems to be clear: the value proposition of traditional grocery retailers will likely revolve around extreme convenience and experience shopping, enabled by all-encompassing technology.

Conclusion

Disruptive change is reaching supermarkets and this will permeate the entire food industry supply chain. Technical innovations online and in-store along with shifting consumer demands are bound to redefine the supermarket of the future. Traditional grocery stores will have to incorporate cutting-edge technology online and in-store as a means of differentiation to accommodate consumers and fight off discount competition.